Even experienced professional investors can find it difficult to avoid investment fraud.
Steve Sampler knew a thing or two about finance when he first heard about an opportunity to invest in an oil well. A licensed stockbroker with years of investing expertise, he was very familiar with the stock market and had experience in analyzing investment opportunities. But the oil well deal turned out to be a scam—and the $40,000 he invested vanished. "If it can happen to me," Sampler said, "it can happen to anyone."
So how did someone as experienced as Sampler fall for the scam? The con used a fraud tactic called "scarcity." He created a false sense of urgency by telling Sampler that he had to move fast because there were only a few units of the investment left. Then the scammer promised that Sampler would make 10 times his investment, dangling the prospect of easy wealth in another tactic known as "phantom riches."
And before the scammer even put these fraud tactics into play, he used one basic and often successful trick—he got personal with the victim. The scammer got to know Sampler and made a personal connection with him.
"Everyone has a tendency to trust people," Sampler said. "Once you get to know them particularly, you want to trust them. You don’t want to think badly of them."
Before you make any kind of financial investment, follow these steps to avoid becoming a victim of fraud:
Ask and check before investing. Ask the seller if he or she is licensed to sell you the investment. And ask if the investment is registered. Then check out the seller and the investment yourself—even if you know and trust the person. If Sampler had looked up the investment, he would have found that it was not registered.
Avoid the “scarcity” tactic. Beware if a seller says you have to act now or you’ll miss out on the investment. If an investment is legitimate, it will still be available tomorrow.
Don’t fall for the “phantom riches” tactic. The best way to avoid getting caught up in the lure of phantom riches is to slow down the seller’s pitch. Ask questions, and tell the seller you need time to think about the offer.
For more resources on spotting investment fraud tactics, visit the FINRA Foundation's website www.SaveAndInvest.org/FraudCenter.
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